Defense braces for 'self-amputation'

Sequestration or not, the defense industry is bracing for a bad decade.

Contractors are hoarding cash. Top firms are eyeing potential mergers. And old alliances are cracking. Even senior Republicans on the House and Senate Armed Services Committees acknowledge a shrinking military is inevitable as the U.S. withdraws from Afghanistan after more than a decade of war.

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Chuck Hagel’s rise to the top of President Barack Obama’s shortlist to succeed Leon Panetta as Defense secretary is the latest sign the White House is preparing for a big drawdown — beyond the $487 billion reduction in Pentagon spending already on the table.

Hagel, a former Republican senator from Nebraska, has said the Simpson-Bowles deficit-reduction plan should act as a starting point in negotiations to rein in the federal deficit. The plan, designed to produce a balanced budget by 2015, would require steep cuts in military spending, calling for an end to such big-ticket programs as the Joint Light Tactical Vehicle, the V-22 Osprey and the Marine Corps variant of the F-35 Lightning II.

Against this backdrop, military commanders and industry executives are positioning themselves to survive the coming “period of austerity,” as Marine Commandant Gen. James Amos has described it, which could result in mergers, layoffs and other cost-cutting measures.

“I’m going to have to make some really hard calls,” Amos said in an interview in his Pentagon office, explaining that further cuts could force him to cancel or scale back major weapons programs, such as the JLTV. “I don’t know if I’m going to be able to afford that,” Amos said of the service’s plan to buy 5,500 of the tactical vehicles. “The juice might not be worth the squeeze.”

Defense insiders are cautiously optimistic Congress will act to avert sequestration, which would reduce Pentagon spending by about $55 billion during the current fiscal year. For them, the real problem is what comes next.

“There are few companies, if any, planning for a full-year sequester,” said defense consultant James McAleese.

But a deal to stave off the automatic spending reductions is almost certain to include defense cuts of its own, he said. And that’s only the beginning. “This confrontation is going to be happening either every year or every other year,” he warned.

The president’s latest deficit-reduction plan would slash the defense budget by another $100 billion over 10 years. And McAleese said he views that number as a floor, not a ceiling. “The market’s expectation is that the compromise would be $15 [billion] to $20 billion,” he explained, referring to cuts carried out each year over a decade.

Loren Thompson, another prominent defense consultant, said the end result will be reduced orders for weapons and procurement programs stretched over longer periods of time.

“We appear to be at the beginning of a long downward trend,” Thompson said. “You don’t need sequestration in order for that trend to unfold, but you will definitely need some sort of new threat in order for it to stop.”